The 3 Types of Innovation: Product, Process & Business Model

Innovation has become such a ‘dear’ word to every aspiring person. Everyone has a different meaning to the word itself as per his/her comfort or understanding. The word innovation has lost its actual meaning!

In this article we have classified the ways an organization or a team can innovate in 3 broader ways – Product, Process or Business Model.

Product Innovation

People often think of Product Development when talk “innovation”. However, it is deeper than it meets the eyes. Product Innovation can be further classified into 2 types:

1. New Product Development
2. Product Enhancements
   1. New Features
   2. Performance Upgrades

Drivers of product innovation might be technological enhancements, changes in user requirements, or outdated product design. Product innovation is generally visible to the end consumer and should result in a greater demand for a product once implemented thoughtfully.

There are important stages while introducing Product Innovation offering to the masses:

1. Market Research – This can be done in the form of primary and secondary market research where the business will gather as much information as possible about the present tastes and preferences of its potential consumers, and the gaps filled in the business’s particular industry. One advantage of primary market research over secondary market research is that it delivers much more specific results than secondary market research, and is only available to the business itself, rather than secondary research which is made globally available, as data has already been collected.
2. Feasibility Study – The business will now look at the legal and financial restrictions of launching the product into the market. This is where the business will create sales forecasts, establish the price of the product, the overall costs of production and profitability estimates. The business also has to consider legal aspects in terms of safety and Intellectual Property Rights (IPR).
3. Product Development
4. Testing
5. The Rollout

Process Innovation

Process innovation is probably the least attractive form of innovation and often left out, but it can reap you benefits up to many folds! Process innovation happens when an organization solves an existing problem or performs an existing business process in a radically different way that generates something highly beneficial to those who perform the process, those who rely on the process or both.

For example, the introduction of a completely new sequence to an existing production process that speeds production by 100%, thereby saving the organization money and time, could be considered a process innovation. Process innovation can include changes in the equipment and technology used in manufacturing (including the software used in product design and development), improvement in the tools, techniques, and software solutions used to help in supply chain and delivery system, changes in the tools used to sell and maintain your good, as well as methods used for accounting and customer service.

Process is the combination of facilities, skills, and technologies used to produce, deliver, and support a product or provide a service. Within these broad categories, there are countless ways process can improve.

Values deriving from process innovation include reducing the time it takes to produce a product or perform a service; increasing the number of products produced or services provided within a time frame; and reducing the costs per product produced or service provided. Additionally, process innovation can generate significant gains in product quality and service levels. Overall, an individual organization needs to see a significant increase in some of its key performance indicators (KPIs) to be a true process innovation.

While product innovation is often visible to your customers, a change in process is typically only seen and valued internally. Speaking generally, changes in process reduce costs of production more often than they drive an increase in revenue. Of the three types of innovation, process is typically the lowest-risk.

Business Model Innovation

Business model innovation does not necessarily imply changes in the product or even in the production process, but in the way as it is brought to the market. BCG quotes:

Product and service innovation are essential, but business model innovation can deliver more lasting competitive advantage, particularly in disruptive times.

Business model innovation is the art of enhancing advantage and value creation by making simultaneous—and mutually supportive—changes both to an organization’s value proposition to customers and to its underlying operating model. At the value proposition level, these changes can address the choice of target segment, product or service offering, and revenue model. At the operating model level, the focus is on how to drive profitability, competitive advantage, and value creation through these decisions on how to deliver the value proposition:

• Where to play along the value chain
• What cost model is needed to ensure attractive returns
• What organizational structure and capabilities are essential to success

Four Approaches to Business Model Innovation:

1. The reinventor approach is deployed in light of a fundamental industry challenge, such as commoditization or new regulation, in which a business model is deteriorating slowly and growth prospects are uncertain. In this situation, the company must reinvent its customer-value proposition and realign its operations to profitably deliver on the new superior offering.
2. The adapter approach is used when the current core business, even if reinvented, is unlikely to combat fundamental disruption. Adapters explore adjacent businesses or markets, in some cases exiting their core business entirely. Adapters must build an innovation engine to persistently drive experimentation to find a successful “new core” space with the right business model.
3. The maverick approach deploys business model innovation to scale up a potentially more successful core business. Mavericks—which can be either startups or insurgent established companies—employ their core advantage to revolutionize their industry and set new standards. This requires an ability to continually evolve the competitive edge or advantage of the business to drive growth.
4. The adventurer approach aggressively expands the footprint of a business by exploring or venturing into new or adjacent territories. This approach requires an understanding of the company’s competitive advantage and placing careful bets on novel applications of that advantage in order to succeed in new markets.

Out of the types of innovation we are discussing, both product and process innovation can be incremental and moderate, business model innovation is almost always radical, risky, and transformative.

When talking about business model innovation, without a doubt, names like AirBnB, Uber, or Spotify will come up. These are perfect examples of fast-moving companies that were able to disrupt age-old markets (hotel taxi, music) by tweaking or inverting their industry’s traditional business model.

Because of these powerhouses, many might assume only startups are capable of massive business model innovation. Startups have a big advantage due to their ability to iterate and adapt their model as they are in the process of creating an initial business model design. However, there are several large, well-established organizations that have leaned into their advantages of a larger customer base and greater resources to challenge their existing business model and “disrupt” themselves.

Once you’ve identified your specific type of innovation suitable for your organization to move to the next levels, you can begin asking more helpful questions to your business consultants and leaders.

By developing a sense of understanding towards these 3 Types of Innovation: Product, Process & Business Model, you can further align your thoughts to become more focused, specific and effective innovator.